It’s been a record-breaking week for stocks here and on Wall Street, as key market players bought up big on the signing of the trade deal.
The US and China have signed a “Phase 1” trade deal and global share markets have rallied. The Australian ASX200 share index rose above 7000 points for the first time. The Dow and S&P 500 indexes were up 1.8%, the Nasdaq put on 2% and our S&P/ASX 200 finished the week also up 2%, meaning we’ve added a huge 5.7% since the start of 2020!
Now that’s huge and it has taken us over the 7000-level, to end the week at 7064.1.
And to make matters even better, rain came for a big chunk of the country where bush fires have been running wild. And while our economy still looks challenged, the prospect that the Federal Government and its State counterparts are going to have to spend to repair the damage from the fires will actually be a plus for the economy over time.
But it was the trade deal signing that was the biggest driver and its impact on global economic growth that has kept it positive for stock markets worldwide this week. Along with some other pluses for markets, it explains the positivity for shares, which still might have a time to run before a pullback eventually kicks in. Let me list them for you:
- The Phase One trade deal takes away a degree of uncertainty.
- It prevents further rounds of tariffs.
- It should boost business confidence and investment from companies that were vulnerable to the trade war.
- China is going to buy $US 200 billion worth of US exports.
- Chinese economic data was better than expected (see in my “likes’ section).
- US housing starts, out overnight, surged 17% to a 13-year high!
- US overall economic data remains a positive for stocks.
- CNBC says FactSet shows that of the 8% of companies that have reported, 72% have beaten expectations.
But I guess you’re asking: can this last?
I expect an eventual sell off but then a rebound, so we end higher for the year. If you need convincing that the huge year of 2019 where the US market was up 29% has to be a big weight against progress for stocks in 2020, recall what happened in 2018.
The chart below shows that the S&P 500 index was at 2929 on 1 September but is now only 3324.2. That’s only a 13% gain. If you go back to January 2018, the two-year gain is only 24%, or 12% per annum. If the improving US economy is clearly helped by the trade deal and better NAFTA (North American Free Trade Agreement) for the US involving its trade with Mexico and Canada, the reasons to be pro-stocks for 2020 make more sense.
Source: INDEXSP:.INX
To the local story this week and apart from Monday, it was all green on the screen, driven by the good trade deal news but also a belief that interest rates will be cut again as a booster for the economy hurt by the bush fires with its effects on tourism, retail and confidence.
Despite this, the banks had a good week, which will make my colleague Paul Rickard happy as we have both been bank believers, when we’ve been asked about them in our Switzer webinars [1].
The CBA rose 1.9% for the week to $84.04, Westpac was up 1.5% to $25.01, NAB put on 2.1% to $25.46, while ANZ sneaked 1.3% higher to $25.44.
Iron ore prices helped the likes of BHP, Rio and Fortescue, which gave the market index momentum higher as well, with the latter up 6.6% for the week!
The WAAAX stocks are back in favour, with Appen up 12.2%, Altium 7.9% and EML Payments, which we gave the thumbs up to at our microcap conference becoming a new market darling. It rose 9% to $5.26 this week.
All up, this has been a great start to the year and fortunately the reasons to be too worried about an imminent sell off aren’t numerous. I do believe there has to be a period of profit-taking but time looks to be on our side.
What I liked
- The signing of the trade deal phase one!
- The US Conference Board Measure of CEO Confidence™, which declined to 34 in the third quarter of 2019, rebounded to a reading of 43 in the fourth quarter (a reading of more than 50 points reflects more positive than negative responses).
- The value of home loans rose 1.8% in November, with owner-occupier loans up 1.6% and investor loans up 2.2%.
- Total building and construction work yet to be done stood at $144 billion at the end of September, just off 4½-year highs but up 3.9% on the year. Commercial building work yet to be done stands at record highs.
- The weekly ANZ-Roy Morgan consumer confidence rating rose by 1.1 points (1%) to 107.3 – the first lift since early December. Sentiment remains below both the average of 114.2 points held since 2014 and the longer-term average of 113.1 points since 1990.
- By value, credit and debit card purchases rose by 0.5% in November, to be up 6.7% on the year.
- US consumer prices rose by 0.2% in December (forecast +0.3%) to be up 2.3% on the year – a healthier inflation rate is a plus.
- The Philadelphia Federal Reserve index rose from +2.4 points to +17 points in January (forecast +3.8 points) – that’s a huge rise!
- Shares in Morgan Stanley rose 6.7%, after reporting a 46% lift in quarterly profits, well ahead of estimates – that’s huge too!
- The Beige Book report from the Federal Reserve showed that economic activity expanded modestly in the final six weeks of 2019, with manufacturing “essentially flat”, which was only OK.
- Luxury stocks in Europe rose on broker optimism for the sector, with shares in Louis Vuitton owner LVMH up 1% to record highs.
- The Chinese economy grew at a 6% annual rate in the year to December, which was bang on forecast, but retail and industrial production beat forecasts, as did fixed asset investment.
What I didn’t like
- The number of dwelling starts fell by 11.7% in the September quarter, after rising 1.5% in the June quarter.
- The Melbourne Institute’s headline inflation gauge rose by 0.3% in December to be up 1.4% over the year (lowest since July 2019). The Reserve Bank’s preferred underlying inflation measure – the trimmed mean gauge – fell by 0.1% to remain up 1.5% on the year.
Keeping my eye on the data
As the report above shows, the US economy isn’t going to be the fly in the ointment that could KO this leg up for the bull market but locally it will be the run of economic data that I’ll be watching carefully. This week’s likes versus dislikes is heavily skewed to the “likes” but many of them are from foreign sources. Next week we get the latest unemployment news, consumer sentiment, household spending intentions and the latest purchasing managers readings. We need these numbers to give us confidence that Australia can keep avoiding a recession but the bush fire effect on the economy has to be a real worry.
Most of you know I don’t like being unnecessarily pessimistic but despite my preference for optimism, I won’t let it mislead you.
Enjoy the rain. I hope you’re getting plenty.
On our YouTube channel:
Our YouTube shows resume next week – so stay tuned for new episodes!
- The charts say stocks boom in 2020! [2] – Switzer TV: Investing
- Property princess pinpoints the property hotspots! [3] – Switzer TV: Property
Top Stocks – how they fared:
The Week Ahead:
Australia
Tuesday January 21 – CBA Household spending intentions
Tuesday January 21 – ANZ/Roy Morgan consumer confidence
Wednesday January 22 – Consumer sentiment (January)
Thursday January 23 – Labour force (December)
Friday January 24 – ‘Flash’ purchasing managers index
Overseas
Wednesday January 22 – US National activity index (December)
Wednesday January 22 – US House prices (November)
Wednesday January 22 – US Existing home sales (December)
Thursday January 23 – US Leading index (December)
Friday January 24 – ‘Flash’ manufacturing & services (January)
Food for thought:
“If you want happiness for an hour – take a nap. If you want happiness for a day – go fishing. If you want happiness for a year – inherit a fortune. If you want happiness for a life time – help someone else.”
– Chinese proverb
Stocks shorted:
ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.
Chart of the week:
This table published by CNBC in the article ‘China says its economy grew 6.1% in 2019, in line with expectations’ on January 16, 2020.
Top 5 most clicked:
- My early stock picks for 2020 – Peter Switzer [4]
- Our portfolios for 2020 – Paul Rickard [5]
- 4 export stock tips and 1 for the speculators – James Dunn [6]
- Don’t sell your oil & gas shares and buy a Tesla, just yet – Max Williamson [7]
- Buy, Hold, Sell: What the brokers say – Rudi Filapek-Van Dyck [8]
Recent Switzer Reports:
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